Latvia PM pledges tighter bank controls to defuse U.S. standoff

RIGA (Reuters) - Latvia will invest more in monitoring banks as it overhauls financial controls, Prime Minister Maris Kucinskis told Reuters, after the United States accused one of its biggest banks of money-laundering and breaching sanctions on North Korea.

He said a levy on financial transactions by shell companies, which often disguise account holders, was one of many options discussed by ministers this week.

Their widespread use and the presence of more than 10 banks that take deposits from customers in Russia and other fellow ex-Soviet states has led the United States and others to accuse euro zone member Latvia of allowing money laundering. Washington has issued repeated warnings to Latvia to reform.

“Our ultimate goal is to eradicate any suspicious transactions. We don’t want the banks who are just using Latvia or its vulnerabilities to make money,” Kucinskis said in an interview.

“This is definitely not the future we have envisaged for ourselves. We definitely do not want to become the Switzerland of the EU. When it comes to shell companies, the dangers outweigh the benefits.”

When Latvia regained its independence in 1991, some banks promoted themselves to Russians as a gateway to western financial markets, promising secrecy surrounding the identity of clients similar to that in Switzerland at the time.

In one television advert of that time, a boy enters a bank branch with a small sack of money, asking the banker if he will “tell his mother”. The banker shakes his head.

Many banks taking foreign deposits did not deal with the customer directly but with shell companies, where it was difficult to prove who the owner was. Latvian bankers say controls are now tighter although critics believe such structures still allow money laundering to take place.

Last month, U.S. authorities alleged that the country’s third-largest bank, ABLV, had engaged in money laundering and broken sanctions on North Korea. The accusations effectively froze ABLV out of U.S. dollar financial markets, prompting its closure and hurting some local peers.

ABLV has denied wrongdoing.

“We have to introduce additional controls,” Kucinskis said in the interview. “This will mean a restructuring and capacity building. We are going to audit the whole system.”

A pure gold bar is seen in the ABLV bank head office in Riga, Latvia March 7, 2018. REUTERS/Ints Kalnins

On Thursday, Marshall Billingslea, who leads the Office of Terrorist Financing and Financial Crimes at the U.S. Treasury, will visit Riga for meetings with some top Latvian officials.

Kucinskis said the government’s overhaul was likely to see the number of Latvian banks involved in this business of dealing with foreign clients reduced. The country’s banking sector watchdog has said similar. [L5N1QP6JX]

“Given the size of our economy and the size of the population, the number of banks will most probably in future go down. We want to make sure that the bank reduction process is a controlled process,” the prime minister said.

WEAK ENFORCEMENT

But some are skeptical that the Latvian government will be able to deliver on its promise of stamping out money laundering, arguing that the country’s justice system has proven to be weak.

“In Latvia, we have the best legislation. The problem is in enforcement,” said Janis Bordans, a former justice minister and founder of the New Conservative Party, which will campaign in October elections against corruption.

“If you are only writing good laws and then allowing criminally gained funds on your territory, then you have a problem.”

Latvia’s government is struggling to repair its image, damaged not only by the money laundering allegations but also because of a corruption probe that led to the detention of its central bank governor.

Last month, Ilmars Rimsevics was held by anti-corruption agents who said they suspected him of taking a bribe of more than 100,000 euros ($123,000).

He denies any wrongdoing and is refusing to resign, putting the government in an embarrassing position, not least because he has kept his role as a member of the European Central Bank’s influential policy setting committee. It meets on Thursday without Rimsevics, who is banned from leaving Latvia.

Rimsevics’ lawyer told Reuters that they will attempt to challenge restrictions imposed by Latvian investigators on his freedom to work, seeking to take their case to the European Court of Justice.

Kucinskis reiterated his call on Rimsevics to quit. “Crooks and thieves will be prosecuted in due process,” he said. “He should step down.”

Latvia was one of the countries hit hardest by the global financial crisis, falling into recession as the government sought an international bailout, nationalized Parex Bank and made spending cuts amid a wave of emigration.

Reporting by John O'Donnell and Gederts Gelzis; Writing by John O'Donnell; Editing by Catherine Evans